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Blackhawk Network Holdings, Inc. (NASDAQ:HAWK)

Q2 2014 Earnings Conference Call

July 16, 2014, 05:00 PM ET

Executives

Patrick Cronin - Vice President, Finance and Investor Relations

William Tauscher - Chief Executive Officer and Chairman

Talbott Roche - President

Jerry Ulrich - Chief Financial Officer and Chief Administrative Officer

Analysts

Ramsey El-Assal - Jefferies

Jim Schneider - Goldman Sachs

David Chu - Bank of America

Bryan Keane - Deutsche Bank

Mike Grondahl - Piper Jaffray

Operator

Welcome to the Blackhawk Network's second quarter 2014 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Patrick Cronin, Blackhawk's VP of Finance and Investor Relations. Please go ahead.

Patrick Cronin

Well, thank you, operator, and good afternoon, everyone. Before we get started, as a quick reminder, a copy of the earnings release that accompanies this call can be accessed from our Investor Relations website at ir.blackhawknetwork.com.

With me today to discuss Blackhawk's second quarter 2014 earnings results is Bill Tauscher, our Chairman and Chief Executive Officer; Talbott Roche, our President, who is traveling in Europe this week and join us remotely; and Jerry Ulrich, our Chief Financial and Administrative Officer.

Before I turn the call over to Bill, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws. Forward-looking statements contain information about future operating or financial performance. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. However, we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a list and description of those risks and uncertainties please see our filings with the SEC.

And with that, I'd like to turn the call over to Bill Tauscher.

William Tauscher

Thank you, Patrick, and good afternoon, everyone. We are pleased with our second quarter 2014 financial results. We delivered adjusted operating revenue growth of 29% for the second consecutive quarter, adjusted EBITDA growth of 14%, adjusted net income growth of 2%, and adjusted diluted EPS growth of 6%, exceeded our guidance for a couple or reasons.

First, we received a favorable court ruling on a patent litigation matter, resulting in the reversal of a fiscal year 2011 loss accrual, which together with interest, reduced general and administrative expenses for the second quarter by $3.9 million or $2.3 million after-tax.

Second, we were able to complete a contract amendment with our incentives products issuing bank that better matches fee revenue with delivery and use of our prepaid incentive cards as compared to the previous accounting treatment.

As a reminder, we have mentioned on prior calls that post acquisition of InteliSpend, the accountants changed the historical accounting for a portion of InteliSpend's postcard expiration revenues. We cited this as a headwind entering the year, but with full intentions to shift the agreement with InteliSpend's issuing bank for the Visa and MasterCard incentive cards to a model more consistent with the program, management fees we would earn in our core gift card business.

So while we intended to execute this bank amendment at some point in 2014, the timing of the execution was earlier than expected, and it included coverage for cards issued under certain of InteliSpend's programs from the beginning of the year.

Excluding the litigation matter and this bank amendment, our adjusted net income exceeded the high-end of the second quarter guidance we provided last quarter. This was due to the combination of strong U.S. retail open loop gift card sales and growth in international.

As we said in our earnings release, load value grew 36% in total or 25% excluding load value from InteliSpend and Retailo, which we acquired in late 2013. Within that overall growth, international load value grew in excess of 80%, and represented 21% of worldwide load value for the second consecutive quarter.

Second quarter GAAP revenues totaled $284 million, and was an increase of 26% over the second quarter last year and consistent with growth in the first quarter of this year. Commission and fees, which are driven primarily by closed loop gift card sales increased 22% for the quarter.

Program management, interchange, marketing and other fee revenues or PIMO, as we refer to it, increased 40%, primarily the result of strong growth in the U.S. retail open loop gift card sales and the addition of the InteliSpend results. Finally, revenues from product sales grew 35%, with two-thirds of the growth coming from Cardpool and one-fourth of the growth coming from card services, our printing business, and the remainder from telecom handsets.

Adjusted operating revenues, which are total revenues net of the share of commissions and fees paid to our distribution partners, grew 29% for the quarter to $139 million. Again, the same growth rate as our first quarter of this year.

On a GAAP basis, net income for the [technical difficulty] from $2.1 million in 2013 to $5.1 million in 2014. The increase was driven by the positive impacts of overall business growth, the benefits from the favorable court ruling and the amended issuing bank contract, and lower non-cash mark-to-market expenses this year as compared to last year's expense associated with the partner equity instruments at the time of the IPO.

These positive items were partially offset by lower open loop gift revenues in Australia due to the lumpy card expiration revenues recognized in the second quarter of 2013 that we previously described, and intangible asset amortization expenses related to the InteliSpend and Retailo acquisitions. GAAP diluted earnings per share was $0.09 in Q2 2014 compared to diluted earnings per share of $0.04 in Q2 2013.

Next, we want to highlight some of the underlying business developments for Q2 2014. I'll begin with international, and then I'll turn it over to Talbott to cover the milestones in the U.S. The strong total load value growth for international was driven by the Retailo acquisition; growth in South Africa and Japan, where sales of digital content cards have been very strong.

Those are two of the countries where we have sub-distribution arrangements, so the revenue we obtain is lower, which is a driver for 29% adjusted operating revenue growth as compared to 36% load value growth for the company overall. But as we mentioned before, we have minimal costs associated with these lower revenue rates.

Turning to the business in Europe. We transitioned 600 additional card for Belgium stores into our network that were formally with one of our competitors, and active selling store count in Belgium reached 1,500 for this year's second quarter compared to just under 800 last year.

The open loop category growth in Europe continues at a triple-digit pace, and represents as much as 20% of total load value sales in few of our European accounts, but overall is only 5% of the load value across Europe. As we expand our own program manage open loop products across Europe, we expect this category to be a key revenue and profit growth driver for our EMEA region moving forward.

Shifting to the Americas other region. In Canada, we added the Amazon.com gift card and also signed an agreement to provide digital content to the Royal Bank of Canada's wallet, Canada's number one bank and PayPal Canada online. We're now selling gift cards on one of the Canada's largest etailers SHOP.CA. In Mexico, we launched Google Play. And in Brazil, we've established a relationship with Wal-Mart.

Finally, turning to the Asia-Pacific region. In Japan, we launched Sony as a new content provider along with iTunes and Google Play. Japan load value growth exceeded 200% for the second consecutive quarter. In Australia, we signed an agreement to launch Apple and Google into the Optus retail network with approximately 300 locations.

And finally, we mentioned on our last quarterly call that we launched Singapore in late Q1 with our Japanese partner. We've now established distribution partner relationships with all the major convenience chains in Singapore, including 7-Eleven.

Now, I'll turn it over to Talbott, who will provide an update on recent milestones in the U.S. Talbott?

Talbott Roche

Thank you, Bill. Overall, for the U.S. load value growth was 27% or 21%, excluding InteliSpend, which was all net new for the second quarter. Open and closed loop gift cards at retail grew in the low-teens in Q2 consistent with Q1 2014 growth rates. In our U.S. distribution partner network, we renewed nine contracts during the quarter, five of these distribution partners agreed to five-year terms and the remainder were three-year terms.

We remain on track to achieve our goal of moving another 1,200-plus grocery locations to our best practices by yearend. Strong open loop gift card growth trends continued for the second consecutive quarter, and the growth is being driven by three factors: first, successful marketing promotions in retail and etail channels; second, the expansion of the availability of variable load cards and resulting increase in average load value per card; and finally, the addition of new distributions, such as Home Depot stores.

In the closed loop gift card category, we now have 60 content providers committed to launch variable load products, which based on test results, increased our average load value per card by 8% to 10%. Additionally, Google Play expanded into many of our top-U.S. distribution partners and is growing steadily, but it remains much smaller in the U.S. as compared to international from a load value perspective.

In prepaid telecom, so far we have launched our new SIM card product in over 5,000 stores. The SIM cards allow consumers to quickly convert handsets they own to a cost savings prepaid plan. While new to the U.S., these products have significant share of the prepaid market in Europe's more mature market.

Load value for our financial services products that include our own PayPower branded general purpose reloadable cards, the new T-Mobile Money product, and selected distributed products from Green Dot, NetSpend, PayPal and others, nearly doubled compared to Q2 last year.

T-Mobile's Mobile Money product now sells in approximately 3,000 T-Mobile locations, and is launched successfully in over 1,500 Blackhawk Network retail locations during the second quarter. While initial loads of Mobile Money are meeting our expectations, reload activity is falling short.

Turning to InteliSpend's incentives and rewards business. We are on tack with our goal of introducing closed loop card content to InteliSpend's product portfolio during the second half of 2014. We believe that once we combine Blackhawk's broad closed loop content with InteliSpend's strong Visa, MasterCard and Discover solutions, we will be able to offer the broadest prepaid card solution for the incentive and rewards channel.

Finally, on the digital side of our business, volumes remain modest, but expect to see some interesting momentum, as we exit 2014. We launched 20 additional eGift cards in the quarter, including a few of our larger partner brand such as Best Buy and Macy's. We are now able to offer online approximately 270 eGift cards from great retailers across the country.

Digital content is expanding and we are gradually seeing more promising opportunities for distribution of this content. We expect Amazon will add our eGift offerings to their physical gift cards that we are already supplying through Amazon.com in the second half of this year.

We are also in the process of launching Capital One credit card awards program and the Google Wallet in the second half of 2014. In aggregate, across all our online etail and digital channels, load value has continued to grow at a triple-digit pace representing about 3% of U.S. load value in the second quarter.

I'll now hand it over to Jerry, who will provide more detail on the financials.

Jerry Ulrich

Thanks, Talbott. First, I'm going to provide a little additional color on the Q2 results, and then we'll also give our thoughts about the remainder of 2014.

So on the revenue side, commissions and fee revenue increased by $40 million or 22% year-over-year, which was pretty much in line with the worldwide load value growth from the closed loop products that really drive the bulk of this line of revenue. As a percentage of total load value, commissions and fees was 8.3% in this year's second quarter, down about 95 basis points from the year-ago quarter.

And the vast majority of this decline in this ratio was due to a higher rate of load value growth from the association-branded open loop products that include Visa, MasterCard and Amex gift cards, the financial services products and InteliSpend incentives and reward solutions, all of which have a higher portion of revenues under the PIMO or program management, interchange and other fee line.

So in fact, if you look at the ratio of revenues, excluding the marketing pass-through revenues and excluding product sales, and then after deducting our distribution partner share of commissions, and what we refer to as pro-forma adjusted operating revenues, they were 3.8% of load value for the second quarter compared to 4.1% last year.

This is a more modest 30 basis point decline and it's driven specifically by the higher growth in financial services load value that has a lower net revenue percentage contribution, as well as the lower revenue margin related to load value growth in the South Africa and Japan market that Bill described earlier.

Moving to the second line of our income statement. Program, interchange, marketing and other fees increased 40% in the second quarter or 42% excluding marketing revenues. So again, this increase was driven by strong sales of the open loop gift cards and the additional revenue related to the issuing bank contract amendment that Bill referenced earlier.

For the second quarter, our adjusted operating revenues exclude $1.3 million that represents the additional revenue from the issuing bank contract amendment that was for product deliveries in the first quarter, as shown in Table 2 of our second quarter earnings release.

So this adjustment only applies to the second quarter and there would be an offsetting increase in adjusted operating revenues for the first quarter. So if you're looking at that Table 2, just to understand that impact for the year, there would be no net adjustments related to that item.

Turning to the expenses. Distribution partner commission expense increased $26 million or 22% year-over-year, just slightly less than the commission and fee revenue growth, if we go out to an extra decimal. So as a percentage of commissions and fees, we are at 66.6% for the second quarter, flat to Q1 and 20 basis points better than the second quarter of last year, due to changes in distribution partner mix and channel mix on a worldwide basis.

Turning to processing and services. These expenses increased just under $10.5 million, excluding stock-based compensation expense or 31% in the second quarter, and $5.3 million of this increase came from the acquisitions of InteliSpend and Retailo. This represented a 150 basis point increase against pro forma adjusted operating revenues in 2014 as compared to 2013, mainly due to investments in our physical retail network, including fixtures, the cost of the ongoing T-Mobile rollout versus the revenue ramp, and higher depreciation on new technology platforms. We do expect to gradually see improvements in this line, as the T-Mobile ramp comes in line with cost and we reduce the rate of growth in technology, expenditures and retail fixtures.

In looking at the sales and marketing line, these expenses increased $6 million or only 15%, primarily due to a year-over-year $7.6 million decline in the non-cash mark-to-market expense that Bill referenced earlier. So at the time of our IPO in the second quarter, just as a reminder, second quarter of 2013, we recorded approximately $6.9 million of mark-to-market expenses related to the equity instruments held by certain distribution partners.

So excluding this non-cash change year-over-year and stock comp expense and warrant amortization expenses, and then also netting the past-through marketing revenue against the marketing expenses, sales and marketing as a percentage of pro forma adjusted operating revenues increased 380 basis points. This increase was due primarily to increase program development expenditures and the affect of the acquisition of InteliSpend.

On the G&A expenses, they were relatively flat year-over-year in the second quarter, again due to the one-time $3.9 million benefit from the litigation accrual reversal. Backing out this benefit, but adding back approximately $500,000 of expenses incurred to support the legal and tax aspects of the spin-off from Safeway, and then also adjusting for the non-cash stock comp expense, G&A grew 27% year-over-year, including the acquisitions and 6% excluding acquisitions. We do expect to realize expense synergies related to the acquisitions in the second half of 2014 and as we head into next year.

Finally on the expense side. Income tax expense, the effective tax rate on our adjusted income before taxes in Q2 was 37.9%, which was comparable to the prior-year's 36.7%. This year's rate was slightly higher on an adjusted basis, due to benefits booked in the second quarter of 2013 for tax provision to returns true-ups related to prior-year.

We now expect the full year tax rate on adjusted income before income taxes will be approximately 39% as compared to the 2013 actual rate of 38.2%. The 2014 rate does not take into account the expected cash tax benefit from the Safeway spin-off, which I will discuss shortly.

A quick note on cash flows. Capital expenditures were $9.7 million for the quarter, up 8% from the second quarter of last year. So a slower rate as we had predicted, so far this year. Year-to-date CapEx is $18.2 million. So as we look forward to the rest of 2014, we will, in fact, grow CapEx at a lower rate than revenue growth, which will reduce as we go forward into next year, the increase in depreciation expense that we're seeing this year.

As presented in the supplemental schedules in the earnings release, year-to-date free cash flow was a negative $21 million, after adjusting for the change in net settlement payables and receivables from the 2013 fiscal yearend. So again, it is typical for our seasonal business to have negative cash flow in the first part of the year, made up of course with the high volume of sales and activity in the fourth quarter.

We're going to turn now to talk a little bit about Q3 outlook. So as Bill mentioned earlier, we're off to a very solid start to 2014, based on the first two fiscal quarters. We do always remind investors that while we're increasing our revenue diversification with financial services products and the incentives and rewards channel, we do still have a high seasonality in the fourth quarter in our core gift card business.

I would add, however, that all the benefits in the second quarter of the litigation reserve reversal and the amended bank contract for InteliSpend, both were factored into our 2014 plans, they did complete slightly earlier than anticipated. And we believe they should increase confidence in our full year forecast.

So specifically looking at the third quarter, we have mentioned on previous calls, several headwinds that would affect both Q2 and Q3 year-over-year comparisons. For the third quarter, we have an estimated $1.4 million of interest expense related to the new credit facility and expense we did not have last year.

In addition, our investment in ramping the T-Mobile Mobile Money product will continue in the third quarter. And finally, we will incur additional expense related to the Safeway spin-off of Blackhawk including tax consulting expenses. And combined these items will cause our Q3 2014 adjusted net income line to decline by approximately $2 million to $3 million compared to Q3 of 2013, which was $4.0 million.

We are one fiscal period, so a so a four-week period into our third quarter and topline load value growth is holding steady as compared to the second quarter growth levels. During our Q3 earnings call in October, we will provide more specific guidance on Q4. And at this time, our full year guidance remains unchanged from our previous levels.

And I want to talk just a little bit in a more detail, as promised, about the future cash tax benefits that results from the Safeway spin-off. By the end of Q3, we in fact should be further down the path on refining the amount of this annual tax benefit that we expect to receive as a result of the spin-off.

As a reminder, as part of the merger agreement, Blackhawk will assigned the tax benefit over a 15 year period resulting from the amortization of the step-up in the tax basis of Blackhawk assets at the time of spin-off. The annual reduction in current U.S. tax liabilities, which is previously been estimated at approximately $30 million per year, will be reflected in our adjusted net income and adjusted net income per share as an additive item.

The company's tax advisors are currently analyzing the allocation of the basis step up between the U.S. and international entities, which will determine the final benefit that we will realize on an annual basis. The tax benefit is subject to completion of the Safeway Albertsons merger of course, which has been previously announced, expected to be later this year.

And just a refresher on the annual guidance that we previously provided, we said that adjusted operating revenues will be in the range of $670 million to $690 million, which will be growth of 24% to 28%; adjusted EBITDA between $137 million and $142 million, growth of 20% to 24%; and adjusted net income in the range of $64 million to $67 million, 11% to 16% growth.

And if you include the prorated for 2014 cash tax benefit, following the completion of Safeway Albertsons merger, that full year figure will be in the range of $82 million to $87 million or a growth of 42% to 51%. And then finally, our guidance is diluted adjusted EPS in the range of $1.19 to $1.24, excluding the cash tax benefit.

So with that, I'd like to turn it back to the operator to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Ramsey El-Assal with Jefferies.

Ramsey El-Assal - Jefferies

Congratulations on a nice quarter. Also nice to see the continued sort of mix shift to the higher growth markets outside the U.S. Understanding that margins outside the U.S. are lower obviously, and sort of sub-scale relative to the U.S., can you give us some color on the potential sort of cost synergies that you can access when rolling out a new geography? There is really each implementation in these global markets sort of a kind of start from scratch sort of endeavor. Are there some synergies that you can realize from market-to-market?

William Tauscher

There's a number of them. First, all the technology that drives our business is 100% leverageable. So differently, we don't replicate in any country or in any place outside the United States, our datacenters or our technology development. So there's 100% leverage there. Secondly, we have a number of brands, international brands, and in some cases sort of multinational brand that we are able to go into a country and bring to bear or bring into our distribution partners as we sign them.

And then finally, there are certain distribution partners, who are in countries that we're doing business with that make it a lot easier for them to sign as new distribution partners, because they happen to be in a country we're opening up. And we see a bunch of that especially in the Far East. So those are some of the starting points.

Of course, we do have two models just to remind everybody. The first model is what replicates the U.S. from a card partner development, distribution partner development and the management of those partners, and then all the in-country functions of merchandizing and distribution and marketing. And then the second is the one we've talked about in Japan in particular, where we have a partner, who does those local expenses, and we provide technology and we provide that international content. In that case, of course, we have very little cost, but much less revenue per load value dollar.

Ramsey El-Assal - Jefferies

Can you give us an update, last quarter you mentioned a couple of pilots or potential opportunity for pilots, I think there was Whole Foods mentioned, Costco, one of the office supply chains. Is there any updates that you can provide with those opportunities?

William Tauscher

Well, I think the answer there is that our policy is that as we complete them and bring them live, we'll announce them. We are working on all of them and some new ones. That's about as much as I can say.

Ramsey El-Assal - Jefferies

Last question from me. Does EMV migration factor into your business at all? I am thinking more on the open loop side of the business, maybe even specifically on the reloadable side, but on the open loop gift side as well. Is there any palpable impact that you're going to have to deal with sort of from higher card production cost or backend migration? Are there EMV-related activities or is that just not really a factor for you?

William Tauscher

There will be by definition, if you have to put and as you have to put EMV chips in all cards, MasterCard, Visa cards, et cetera, there will be a higher cost for the card, and we'll be affected by that. It's not a big part of the P&L. It won't drive big differences to the P&L, but it is a factor. The other factor that's not talked about as much in the press is that when the card readers are replaced to support EMV, most, if not all, of those card readers will also come with NFC chips. And that replacement forced by EMV could have some interesting results on the move to digital payments.

Ramsey El-Assal - Jefferies

Just one quick follow-up there. So do you plan on sort of phasing in these cards or will there be a time when you just have to kind of go in and swap out a big batch of plastics for EMV updated cards. So is it something that you're -- is it more sort of a gradual as you role out EMV, just kind of in the natural replacement cycle of the cards get swapped out?

William Tauscher

We believe it will be mostly the latter, EMV data is moving around a little bit, people are moving at different paces in United States, but we believe we'll have plenty of ramp to sort of plan it rationally.

Operator

Your next question comes from the line of Jim Schneider with Goldman Sachs.

Jim Schneider - Goldman Sachs

A quick question on the international business. Before you talked about the $20 million revenue contribution from Retailo this year, based on where that's tracking now, what are the chances you might be able to exceed that estimate? And then separately, is there any update to your prior estimate that your international load value can grow about 59% this year?

Jerry Ulrich

I think our response on that, Jim, was that both are on track. So there is always a possibility that we exceed depending on how the fourth quarter turns out, but both the growth rates, load value for all of international and as well as what Retailo's doing are on track nicely.

Jim Schneider - Goldman Sachs

And then a follow-up on the T-Mobile Mobile Money product, where are you in the investment curve on that program? And then I think there was a commentary that Talbott made maybe about the initial loads coming in line with expectations, and then maybe the reloads being a little bit weaker. Can you maybe talk about what you might have to do to kind of improve that reload target rate?

Jerry Ulrich

Yes. I think what we said specifically was that we're happy, we're in line with expectations on kind of the initial sales of the card, but aren't seeing as much reload activity, which means they are being registered at the same rate we would expect. So we are working with our customer jointly to try to influence the customer behavior in that regard and tweak some things about the program as needed.

What it means though from a drag coefficient, if you will, we mentioned the drag for the second and third quarter, so really the question is, do we make traction with the reloads by the end of the year to reduce the drag coefficient in the fourth quarter. I mean we would do some things to mitigate kind of the overall estimated cost, but at the same time, we really want to see the revenue ramp. So I think by the end of the third quarter, when we're on the call, we'll have a pretty good idea how we are progressing on that.

William Tauscher

I would simply add to your statement, this really was our investment year. So the positive effect that T-Mobile is really a 2015 story largely. And so we've got some time here to, let's just say, adjust and work with the program and work with our partner and its awful early. We've literally been in full distribution for almost a quarter I think. So it's still pretty early for something this big and dynamic.

Operator

Your next question comes from the line of Sara Gubins with Bank of America.

David Chu - Bank of America

This is David Chu for Sara Gubins. So what accounted for the jump in commission and fees, as a percent of load value relative to the first quarter? I think it was 8.1% in 1Q and it was 8.3% this quarter.

Jerry Ulrich

I think it had to do with the mix of open loop versus closed loop product is kind of the bottom line David.

David Chu - Bank of America

And so is this 8.3% inappropriate run rate for the third quarter would you say?

Jerry Ulrich

Yes. I mean I think it's roughly in the neighborhood. So it actually, 8.1% in the first quarter, 8.3% second quarter, our forecast for the third quarter would be in between that range, within that range.

David Chu - Bank of America

And then acquisitions added 13% to growth in the first quarter, but about 11% this quarter based on organic trends. So was there a slight slowdown in the growth of InteliSpend or Retailo?

Jerry Ulrich

Well, I think on a relative basis, you'd say, yes. But I think it's more attributable to the growth that we saw domestically, a little bit of a pick up versus the first quarter in our core businesses.

David Chu - Bank of America

And last one for me. The distribution partner commissions as a percent of revenue, is that 66.6%? Should we think that as a decent runway for the second half of the year?

Jerry Ulrich

Yes. I would say, our projection is that we'll end the year in the 66.5% to 66.6% kind of range.

Operator

Your next question comes from the line of Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank

I want to ask about that load volume that the improvement you saw, I think it was 15% x InteliSpend in the U.S. in the first quarter, and then it jumped up to 21%. Is that just an improvement in just retail sales or it that -- how can we explain the increase there?

William Tauscher

No, I think we just had a little bit healthier, remember we talked a bit about lapping promotional programs and so forth. So I think our second quarter was more consistent year-over-year in that regard.

William Tauscher

Yes, I think it's that. We're also seeing some acceleration in our open loop growth. We think there's several reasons for it, but it's a good thing for our business on a relative profitability basis.

Bryan Keane - Deutsche Bank

And then, I wanted to ask about the contractual change in InteliSpend. How much did it -- did it boost revenue and profit in the quarter? Can you quantify it? And then, how much will it boost revenue and profit for the full year? I'm just trying to get my arms around the contract change?

Jerry Ulrich

Well, I think we had, as we said in the call here that it's part of our plan. We knew that we wanted to go to work on this revenue recognition. It does improve relative to what we were recognizing previously, but it was built into the guidance. I mean so I don't think that, one of the things that occurred and we kind of highlighted this when we were on our annual review and forecast meeting in New York in February was that compared to pre-acquisition, there was a change in the accounting that put a drag of about $5.5 million, $6 million on the revenue line for InteliSpend. And essentially, what we've done is addressed that drag. So they will come in line with the expectations we had for them at the time of the acquisition. I don't know if that answered your question.

Bryan Keane - Deutsche Bank

I mean, I was trying to figure out if there was an actual dollar amount figure that it contributes.

Jerry Ulrich

Well, we kind of disclosed, because we had to the Q1 impact. So you just have to extrapolate a little bit, but it's related to the level of activity and load value cards issues and so forth during each quarter. So it was $1.3 million for the first quarter, so that's going to be an indicator of ballparks the amount, but it can vary by quarter.

William Tauscher

I think the way I would sort of express it is, it does apply to both revenue and profit. So we're clear about that. But it's clearly a pick up as opposed to not having it. We expected to get it as we drafted all of our plans. We knew it would help us replace something that we've lost and therefore was this does really is reconfirm our guidance, because something we thought we get to replace a loss has now happened. And the good news, it happened a little earlier, and therefore it's more certain. And even the better news, it happened retro to the first of the year.

Bryan Keane - Deutsche Bank

And just final question. Just the overall guidance, I guess now that we're through two quarters. You talked about it little bit, but just trying to gauge the confidence level, you're kind of running at the high-end of adjusted revenue on the growth right now. Just kind of your confidence level going into looking at the third and the fourth quarter compared to the guidance.

Jerry Ulrich

Well, I think as we've stated last quarter, the growth in the fourth quarter needs to be strong to kind of maintain the pace that we're on. We do have confidence as we said on the call today that we certainly can hit this range that we've previously provided. Bill said that maybe our confidence level the bit increased here.

William Tauscher

I think we've always cautioned that we should do it again. That you have to be careful about reading too much into these low volume, and therefore low profit quarters, our first, second and third quarter. There are businesses still, to a large degree, about our success in the fourth quarter. Having said that some of the events of the first two quarters and the trend lines in the first two quarters have given us more confidence in our guidance, but we still have to manage ourselves and see what the results and the various trends are, as we move into the fourth quarter. But I think what we'd like you to take away is we have reaffirmed the guidance. Our confidence level is up.

Jerry Ulrich

And I think compared to a year ago in the second quarter of 2013 we were trying to assess what really occurred in the second quarter on a ongoing basis versus the temporary basis. So we knew we had some weather things, for example, but we also have some promotional activity that wasn't consistent year-over-year. So I think, as we said, we've sorted that out, have a better handle on that at this stage in the year. And then, from a macroeconomic standpoint, we feel reasonably comfortable based on prognostications on various parties, that the economy stays on track as we move towards the end of this year.

Operator

Your next question comes from the line of Mike Grondahl of Piper Jaffray.

Mike Grondahl - Piper Jaffray

In the U.S., I think the overall load value growth was 21%. What was it for the closed loop part of the business?

Jerry Ulrich

Mike, I think we'll repeat again, we're not going to breakout all the product lines each quarter. It would get us into a kind of a messy level of detail on an ongoing basis that is probably not worth everybody's time. Having said that the core gift card business is growing nicely in that low double-digit teens kind of level, consistent with the first quarter, maybe a tick up. So I think we're happy with that gift card growth open and closed loop combined.

William Tauscher

You should also remember there is clearly an interplay between closed and open. I mean they are not totally distinct like telecom and gift or financial services. They are both gifting products and the consumer is making a choice between the two. So the real valuable number is really the overall growth.

Mike Grondahl - Piper Jaffray

And as you look out at your large grocery customers, what are one or two initiatives that you're sort of really investing in or trying to gain some traction with before kind of the upcoming fourth quarter?

Jerry Ulrich

Well, on an annual basis, of course, it's always best practices, which includes freshening up the content. So there is a bunch of new content. So we're in the midst of what we call the R2 process, the Release 2 for the year. So we do want major reset in the spring, one major reset in the fall that addresses both the partners that have committed to expanding the displays. We've reset the content. We've got new content to put in. So that's an ongoing thing.

And then, there is the promotional calendar itself, so we have twice a year meeting with all the partners to get the calendar worked out. And that includes the amount of spend, the type of program and the specific date that these promos will run. So I think that's really the key initiatives on an annual basis, Mike, that we really work hard with the grocery channel.

William Tauscher

Mike, sitting here in July, we still have some runway to take certain of our customers and expand their content and their fixtures, certain of our partners. A lot it's done in the first half of the year, but we still have some runway left to do that. And we have obviously, identified some important customers that we're working with to do some things before the holidays. Those holiday promotions that Jerry talked about are largely planned, but not fully. So we're working to make sure we have as much of that as possible.

And then of course, this analysis process we go through, which we've gotten much more sophisticated at in terms of content, its contribution, the right content, and we built some new systems in the last year that allows us to literally customize content down to the store level, and take the number of planograms we produce literally to the thousands. It's also providing us some belief that we can get some lift going into the Christmas season. But it's fundamental. There is no sort of sweeping silver bullet here. It's just fundamental execution stuff that we've talked about before.

Mike Grondahl - Piper Jaffray

And maybe just lastly, what one or two countries would you want us to really sort of watch for the back half of this year, where you have some expectations for maybe some accelerating growth?

William Tauscher

Well, we are really pleased with the growth of Retailo. Jerry already told you that. And I think as long as we keep confirming what's frankly extraordinary growth in Retailo, you should be pleased with that. We are working on some things in the United Kingdom, it could be helpful. We'll see whether they come to pass the overall scale of the United Kingdom, we'll move the needle a bunch, but they would be important to where that country goes.

We've got some possibilities with some major partners for some loyalty programs that we haven't had in the past. I think there is a number of other things that are on a long list, but none of them had sort of explode the needle in the way you're probably asking for. We have got some items we're working on in the open loop area that I mentioned in my comments that will carryover into next year.

But again, it's a bunch of smaller things. It's not like a brand new country. But the Google launch in Korea and the Google launch in Brazil will be important, again not because they will explode the numbers, but they will take startup countries into contributing countries as we move to 2015. And Brazil, in particular, is quite a large country. South Korea is quite a rich country. And both of them have huge Android use. So we have some hopes with them, that we'll see some nice numbers and we'll see the beginning of that at the very end of this year.

Jerry Ulrich

And the only other thing I would add is, in Canada what we've had is a number of acquisitions occurring that have impacted our partners. And Bill, in fact, was just in Europe recently meeting with the heads of a couple of these retail chains. And we're optimistic always after those meetings that the commitments are followed through. That would have more impact into 2015, but couple of our large partners there, Loblaw, has of course acquired Shoppers Drug Mart and Sobeys acquired the Safeway portion of the chain in Canada, so both of those have opportunities that we will be focused on in the second half and early next year.

Operator

There are no further questions in queue.

Jerry Ulrich

We want to thank everybody for participating in the call today. And we look forward to talking again at the end of the third quarter.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Blackhawk Network Holdings' (HAWK) CEO William Tauscher On Q2 2014 Results - Earnings Call Transcript

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